“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)

"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Thursday, January 9, 2014

Gold Biding Time; Corn Whalloped

The gold market was relatively quiet in today's session as most traders did not want to get too aggressive ahead of a major payrolls report due out tomorrow. That is when the action should pick up.

It does seem to be holding support at the zone noted on the chart below. That is roughly between $1220 - $1224. Notice that once again volume is shrinking but that volume on the down bars continues to exceed that on the up bars. The bears are still in control for now.

There has been a bit of weakness in the US Dollar today which is helping to bring some small buying into gold but as noted above, it is not large. The mining shares are moving lower perhaps partly in response to a Moody's analysis.
I am noticing that a growing number of the larger banks and analytical firms are lowering their price forecast for gold based on the same things that I and others who read this site have been mentioning - the lack of perceived inflation pressures and the steady rise in US interest rates.

Barclay's is expecting a retest of $1050 in gold later this year. Moody's, mentioned above,  lowered their gold price forecast from $1200 to $1100 and also cited concerns about the health of some miners if prices move that low. That same firm lowered their expected silver price from $20 to $18.

Bank of America/Merrill Lynch lowered their projected gold price 11% to $1,150 and their silver price by 21% to $18.38.

You can see how sentiment in gold is being impacted. This is what I refer to when I try to explain to some that it is SENTIMENT that moves MONEY and it is these money flows or lack thereof that drive market prices. Good traders try to grasp sentiment shifts and move with them in order to profit. They do not get married to their opinions but are responsive to changing market perceptions. If you are wrong; you are wrong and you get out of a trade that has gone bad. You do not sit in it and argue why you are right!

That brings me back to the lack of inflation pressures. Something of importance occurred today -corn prices notched a 40 MONTH LOW. Yes, you read that correctly. Wheat prices scored a 21 month low. Sugar prices hit a 42 month low.

The Goldman Sachs Commodity Index hit a 2 month low today as a result of all this. If there are inflationary pressures building in the US economy, they are certainly not occurring in the general price of commodities, especially in the grains.

The standout to this is in the cattle markets where the combination of back to back drought years in 2011 and 2012, combined with high corn prices until recently, has led to wholesale liquidation across the US herd with the result that supply is now being impacted. Throw in a dose of severely cold, record breaking temperatures, and cattle prices are very strong, record strong I might add. While consumers might get a break from the high prices for grain-based products, they should get ready for sticker shock at the meat counter.

One of the things that I am beginning to do as a result of all this is to re-examine my view of what it is going to take to drive the price of gold higher. For many years now, those who were looking for stronger gold prices have been doing so based on continued weakness in the US economy. That weakness has given rise to the Fed's QE programs. The thinking has been that the longer the US economy remains weak, the longer the Fed will have to continue its bond buying program. The longer the QE program continues, the more liquidity that the Fed must provide and the more liquidity the Fed provides, the more friendly it is for the gold price.

That has obviously not been the case for the last several years. Not only has gold been sinking in price, along with silver, but nearly every other commodity has as well. Large speculators realized that the Fed's program was not having the expected impact on the US Dollar and thus they rethought their reasons for having exposure to anything tangible. After all, if the Fed's programs were not generating rapid growth, then why tie up capital in a sector that was being impacted by both shrinking demand/growing supply.

While this has been going on, we have been getting a series of payroll data. That data, until recently, has confirmed tepid job creation and a shrinking labor participation rate. Taken together, both are NOT a recipe for strong consumer spending. Thus the deflation side of the argument was proven to be the correct side. The economy was limping along fueled only by periodic injections of Fed-supplied liquidity but this was not making it into the broader economy. It stayed in Wall Street but no where else did it seem to go. Thus, no inflationary pressures were building...

I am now of the opinion that those who want to see higher gold prices had best be cheering for STRONG PAYROLL NUMBERS and not weak ones. They had best start cheering for shrinking unemployment numbers based not on a shrinking labor participation rate but rather on real hiring. They had best start rooting for increases in consumer spending noted in retail sales and increases in overall consumer credit. They had best cheer for strong PMI Numbers whether manufacturing based or service based. In other words, if two + years of QE has not produced inflationary pressures because of the structural issues in the US economy then why would another year, or two years, or even five years, do anything? It will not in my opinion.

What is necessary for gold now to recover and begin to trek upwards in sustained fashion is inflation or more accurately, the fear or concern of inflation building into the economy. That is not going to happen until WAGES RISE and wages are not going to rise as long as employers do not have to aggressively compete for workers. What will be needed is a catalyst to shift the sentiment in the market away from its current, "The economy is on the mend with slow but steady growth and no inflation" to one of, "The economy is growing strongly and inflationary pressures are building".

When we might get this sort of shift in sentiment is unclear to me as I no more know the future than the next guy. But I do now believe that is what will be necessary to see gold recapture its allure. I suspect that if and when we get such a scenario as the latter one, we will also see the US Dollar weaken. The problem for gold is that as long as the Dollar remains strong, the "anti-dollar", is not going to be sought after as a refuge.

I am noting that even though we are seeing this weakness across many of the commodity markets and in the GSCI in general, gold is holding support fairly well right now. I wonder, if perhaps gold might just be sniffing out some improvements in the US economy and anticipating such a change. I think its reaction to tomorrow's jobs number might be very informative in this regards. If the market does not completely fall apart if we do happen to get a very strong jobs number, it could be that gold is anticipating this improvement in the consumer's well being as the job market improves. We'll just wait and see what we get and go from there.

Traders - stay nimble and stay objective....


  1. "I am now of the opinion that those who want to see higher gold prices had best be cheering for STRONG PAYROLL NUMBERS and not weak ones. They had best start cheering for shrinking unemployment numbers based not on a shrinking labor participation rate but rather on real hiring. They had best start rooting for increases in consumer spending noted in retail sales and increases in overall consumer credit. They had best cheer for strong PMI Numbers whether manufacturing based or service based."

    I will take at least partial credit for that. A 1978 redux awaits willing gold bugs.

    At least you're willing to change your views, unlike some other people. Slowly, but surely, you will be transformed into a Keynesian, albeit grudgingly. :-)

    Anyway, inflation expectations are beginning to rise, though they're still pretty low. You might want to start following the spread between the yield on nominal treasury notes and their corresponding TIPS. What's interesting this time around is, these expectations are rising while the Fed tapers. Previously they had risen only when the Fed was doing new rounds of QE.

    BTW, for tomorrow's jobs report, here's my prediction: New jobs in excess of about 250K and the unemployment rate falling to 6.9% or 6.8% will probably see gold get a bid. Less than ~150K and gold will also get a bid. Anything in-between will likely see a selloff.

    However, if, for some reason, the unemployment rate falls to 6.7% you might see a big selloff, as it becomes obvious the Fed is going to have to tighten much sooner than expected.

    1. In my opinion you don't have to have good economic data to have large inflation. Hell, it's not just an opinion, I KNOW it, because I experienced it on my skin. And not just 10% or 15% either.
      The inflation coming from good economical practice is a 'good inflation' (oxymoron in terms), but with the prolonged bad economy data and government willing to paper it over, sooner or later you and up with 'bad inflation' and that's the one that is easier to generate than to reign.

    2. So right you are Abraxus. The numbers produced are meaningless to all but traders and wall street. There will be much currency induced inflation but the ECCLESIASTICAL gov't s, statisticians and press releases are in control. It is obvious what is going to continue as gov't s do not give up control till they are destroyed. So just keep buying dips in equities, or wait to short this pig. Their is no way to ever reduce the debt unless "everyone" is ready willing and able to accept hard facts that the US is sucking the world dry through the world reserve currency manipulation.

    3. Exactly! All of this extra money pumped to the system may have not produced price inflation, but it creted huge misallocations of capital that will probably have to be rectified at some point in the future. I'm sure Dan is aware of this, but his view is naturally short-term focused because of what he does. As he said so many times, he's wearing two hats, and his trader hat is his speciality. That's why we listen.

  2. agree with this view. Can see why equities are perceived as attractive. Super low rates while the economy improves. There will be a sweetspot where the economy is improving rapidly, but not so much that inflation is a worry (since there is still so much spare capacity eg in the labor market).

    Dan, interested in your thoughts on rates (eg TNX) as it evolves over time.

    1. Wayne Edwards;

      I am closely watching the yield on that Ten Year as well. Remember how much grief it seemed to give the FOMC when it touched near the 3% level last year? I am wondering at what threshold we might see some noise from the Fed; maybe 3.5%? I am not sure.

      I do not think the Fed wants to see long term rates rise any higher than that right now but that is just a guess. Investors do not seem to have any fear of inflation right now and thus they do not seem willing, at this point, to try to take long term yields much higher but I do think that the interest rate markets will be the best signal we can watch as to how to catch any shift in sentiment in regards to inflation among market players.

      What I do know is that there are enough doves on the FOMC, with Yellen being one of the chief doves, that they do not want to see deflationary pressures building. I have written that the Fed may actually WANT TO SEE GOLD RISE in price along with some other key commodities if it/they were to sink too low. Low commodity prices are a boon to the commodity in the sense of consumers/end users but if they were to keep falling, along with that slack in the labor markets that you noted, I think the Fed could get worried.

      Truth be told not one person on this planet has lived through anything remotely resembling this period - a period in which Central Banks are printing money with near reckless abandon to force long term rates lower. All the while we have a massive amount of sovereign debt building.

      We all have ideas and notions of how we think things are going to turn out but I am the first to admit, I am learning as this process unfolds. That is why I tend to be impatient with those who are convinced they know exactly how things are going to go with some even claiming when. That is absurd.

      I think prudence dictates we hold some physical gold for protection and watch money flows/sentiment indicators/key markets for clues.

      I for one am trying to maintain an open mind about things because being wrong is so expensive.

  3. Dan:

    Thx for the time you spend everyday to give your thoughts online. I think you are correct correlating the PMs with other commodities (except Energy in this case). The grains and the softs have been beaten up and no one talks about manipulation. The poor demand for the commodities have worried me for some time. How can anyone claim that all is well when the demand for the raw materials is lackluster? Until this reverses or a black swan event happens, i do not see any changes in sentiment toward the PMs.

    From a long-term avid PM investor.

    1. Homonculus;

      Thanks for the kind words...
      Yes, demand for commodities needs to increase to reverse the downtrend across the sector in general. What happened is the result of several years of very high, record high in some cases, prices, that resulted in large increases in output/production/supply which is now overwhelming demand at current prices.

      the old saying that the best cure for high price is high prices has proved to be true. I suspect it will be the same this time only in reverse, namely that the best cure for low prices will be low prices.

      Sincere best

  4. Dan is now saying we can't expect the gold price to go higher until the economy improves which will produce the needed inflation to drive gold higher. Is Dan a closet Keynesian economist now coming out of the closet? I always thought he was a goldbug at heart like the rest of us reading his columns. How does Dan expect the economy is going to improve from today going forward? Nobody believes it will except the Keynesians.

    Keynesians believe the Federal Reserve is smart enough to keep pulling the right levers controlling the money supply and interest rates to manipulate the economy into a perpetual boom forever with no recessions or hyper-inflation. Goldbugs believe otherwise. The goldbugs believe the American economy hasn't improved and never will improve with QE from the Fed. QE from the Fed only increases the debt and maladustments that is preventing a real economic recovery. Goldbugs also believe the economy can't substantially improve on its own until after a massive depression or hyper-inflationiary episode purges all the debt and economic maladjustments out of the system.

    With either of these two catastrophic events (depression or hyper-inflation), you want to own gold and silver. If Dan is suggesting we goldbugs have to wait for the economy to improve with some associated relatively mild inflation (without one of these catastrophes) before we can make money in gold he is implicitly endorsing Keynesian economics; if the Keynesian folks are correct let us goldbugs now just admit we've been wrong all these years and sell our gold now and buy the S&P 500 like everybody else. Dan is upset like the rest of us goldbugs over the nasty correction in gold and silver over the last two years. A few years from now, when gold and silver are much higher, the past two years will be a forgotten blip on the radar screen. I understand Dan is a short term trader and doesn't give advice for the longer term so I don't blame him for his negativity about gold and silver right now.

    Personally, I believe the Keynesian school of economics is nonsense and that the Federal Reserve with its endless QE is driving America to disaster. When the disaster hits, we goldbugs will have our day in the sun. If you are a goldbug just continue staying the course and hold onto your gold and silver and buy some more now while its still on sale. If you are a Keynesian and member of the Ben Bernanke / Janet Yellen fan club, just stick with your stock market, you have done pretty well with it the last two years. But l hope all of us goldbugs will just wait a little longer and see who has the last laugh.

    1. You didn't actually seem to read Dan's essay - or, you failed to understand it.

      "The goldbugs believe the American economy hasn't improved and never will improve with QE from the Fed."

      Then you should be believing the US economy will improve as the Fed tapers and, eventually, does no more QE at all. Which is a process that has begun.

      You don't seem to have learned much from the past 2-3 years, nor do you really seem to understand Keynesianism. There even are a fair number of Keynesians who don't believe QE has done any good.

    2. ditkofan;

      Please send me the mailing address to which I may send payment for the psychoanalysis. I would hate to see you labor so diligently at telling me what I am without you receiving any recompense for such herculean labor.

      I am not sure what is with you guys that you are so shortsighted. How many times do I have to write that I do not believe that money can be created out of thin air without producing consequences? I have written that if the Fed can eliminate bear markets in stocks and conjure up permanent prosperity then everything I have ever learned about monetary theory can be thrown out the window and we have entered a brave new era of monetary alchemism.

      Never mind however, I am now a dyed in the wool Keynesian. Thank you from the depth of my being for helping me see the light and understanding what I am so much better. I have no idea how I managed to make it through life without your keen insight guiding me along the way.

      For the record, for the umpteenth time - QE has not worked as far as producing inflation. the FOMC said as much as they WANT INFLATION because they are terrified of deflation. Gold needs inflation. Without an increase in the Velocity of money there will be no inflation. That entails a weaker currency. So something must happen that is DIFFERENT THAN WHAT HAS HAPPENED OVER THE LAST TWO+ YEARS for gold to move higher and remain higher.

      I have said that it will be a loss of confidence. that means a weakening currency just like what we witnessed in the Dollar back when gold soared to $1900 and commodities were roaring higher across the board.

      Gold needs something to generate inflation pressures set up a situation where REAL INTEREST rates are NEGATIVE. You tell me how we are going to get there. It does not matter from what quarter it proceeds. Wages are flat and without sharply rising wages, you are not going to get the kind of turnover of money to start an inflationary trend.

      In the meanwhile, why don't you just learn something from the site and follow the money flow if you want to make money? Those who keep parroting the worn out notion that the only way to make money given the mess the country is in is to buy gold and wait for it to skyrocket higher. How long are you willing to wait for this to happen and tie up all your capital in one basket? If you are, then don't complain to those of us who are attempting to discern what we need to do in order to thrive in these most difficult of times.

    3. "Wages are flat and without sharply rising wages, you are not going to get the kind of turnover of money to start an inflationary trend"

      Dan, I would recommend you start following this guy's tweets. This guy follows stuff that (almost) nobody else does:

    4. Unknown,
      If I understood ditkofan, he does not think (I don't either) that QE can help the real economy. Probably, he also does not think that the tapering will improve it either; hence, he mentioned depression or hyper-inflation wipeout. In my opinion, nothing but return to sound and honest practices by the banks, our leaders and general public can improve the economy. I am not sure about only two choices like depression collapse vs hyper-inflation, which are both possible, but there are many other possible outcomes (war, tyranny, unexpected turns that no one now can predict, etc.).
      I thought that we're all here on the pretty much the same side, but it seems that there are more and more fractions in the gold community. Perhaps it's a sign of nearing the bottom.

    5. First of all, it is neither realistic nor desirable that "all" debt be wiped out - as ditkofan suggested - by whatever means. Debt burdens can be relieved through a combination of growth and moderate inflation. He's basically trying to cure the patient's flu by putting him through chemotherapy.

    6. I know everyone has heard the phrase, "the straw that broke the camels back". With 17 trillion of debt, if rates increase just 2% that's an extra 340 billion a year in interest payments. Plus the debt is still growing. Is there a number that anyone can come up with that will be that last straw in the mountain of debt that will actually make a difference to, either gold, inflation, the dollar or even anyone in the world?

  5. great article. The whole QE thing has gotten real tired and is becoming almost a red herring.

    My only concern is that debt-related deflationary forces have become too deeply entrenched and perhaps permanent. Will the economy be on an IV drip forever? As long as the Feds can service the debt (until next mid decade) we can be under this gray skies scenario for a long time, or until the dollar becomes suspect. I think that may be a while as the dollar may be the last man standing.

    The past couple months brought wild two-sided trading in gold and silver during economic data releases that normally would have brought shape one-sided moves. Even the news of the stupid taper was a short lived impact, as we are back to the exact the gold price as pre-taper.

  6. I am guessing but I am sure even Bernanke is surprised at how much abuse the USD has taken and still keeps standing.
    The US either defaults or inflates the debt away…I cannot imagine default.
    Who knows how far they will go before the rest of the planet figures out just how insane this is all getting.

    Just guessing here but I think once inflation or loss of confidence in the USD finally happens…it will happen real fast and it will be bad.
    Volker had to pump interest rates to what?…20% to try and tame the inflation genie….can you imagine that happening now and what the consequences would be ?
    I do agree with some of the doom and gloomers when they say that this will all end someday…and it will not be pleasant.

    1. I'm sure that the rest of the world does know how crazy the things are with the USD. The thing is that everyone is strategically positioning themselves based on this fact. They are not stupid, but they either have no other option, or they profit from the current state. For a few countries that tried to put a dent in it, we all know how they ended up, so the rest of them keep quiet. It is clear that the situation is immensely complex and a notion that we can somehow see through all of the possibilities and probabilities and try to predict the outcome is ridiculous. We can invest for the long term based on little knowledge we have and dig in, or we can ride the wave and trade. I tried the latter and failed miserably so I'm sticking with the former. That's why I envy those of you who can turn on a dime and cash in on the sea of change.

    2. I hear ya Abraxas

      Don't feel bad about not being wildly successful in trading, I think if you asked Dan he would tell you that even the experienced and skilled traders are having trouble in these markets.

  7. Hey Dan, I consider myself to be objective and I appreciate reading your posts as well as a good number of the comments here. I got the impression that you misunderstood my "Black Knight" comment in the last thread. In the video clip Arthur represents you, the Black Knight represents the rabid goldbugs, the right arm lopped off represents GOFO, the left arm backwardation, etcetera, etcetera. And with no legs left to stand on, the Black Knight will not acknowledge defeat. Did you not get that?

  8. Wow wow wow - DBA, copper and the Australian dollar turning down epically today. Miners also joining the carnage second half of the day.

    You know what these gold leading indicators mean, shorts just setting gold up for a big smash soon as job numbers come out tomorrow.

    Marc Faber, Peter Schiff, Mike Malloney, preppers, stackers and GOTS'ers will be putting "out of business" signs on their doors.

    While the Bernanke "miracle" Fed will be sipping on fine champagne and eating caviar while enjoying early retirement on Wall Street's biggest yachts, LOL!

    -my best Mark impression.

  9. "(Listening to Martin) Armstrong and financial TV, you would imagine that gold didn’t have a chance. Yet every time the manipulators come in to reduce the price they are running into significant physical buying...." - April 24th 2012

    "massive paper gold shorts are now trapped and may see gold gap up to $3,000 if a vacuum in the physical market develops."


    I use to be on the edge of my seat reading this kinda stuff but like many today looking back at it it just makes me chuckle, and would be laughing out loud if I myself hadn't lost money listening to it.

    Almost seems like this physical vs paper market stuff is still being repeated today even though it's already been proven defunct.

  10. Hey Prophet

    I'm with you on that.
    It was this kind of nonsense that stopped me from selling when I should have. Gladly those types of articles didn't make me add to my position.
    It angers me that I fell for this type of crap.
    I am also not at all happy with the people who are behind this type of false and misleading information. Why anyone would hang themselves out to dry like that is beyond my understanding.
    You only lose money if you sell at a loss, nothing wrong with holding your core position. Gold will probably bounce back but going through a nasty correction like this is real hard to deal with.

    I still glance through some of these articles but I always look at the author first…I have a list of authors that I will not even waste 10 seconds of my time reading anymore. They deserve every bit of scorn and venom that we dish out.

  11. Dan,

    Pointing out the obvious, from your comments about people wanting to see higher gold should hope for a stronger economy, again, I don't know what it is, but seems to be "Mary Mary Quite Contrary" this market is!

    Gold up and stock futures tanked after the poor jobs report. Go figure.

    I agree your analysis was likely the correct one, but now what? Honestly, how gold and stocks react to day to day news is a flip of a coin. One day taper kills stocks, next a small taper makes them rise. Here a poor report you'd figure would help keep QE going, which would help stocks, yet the futures got killed.


    1. All that is needed now to put the BEARS into hibernation is a close above 1270. That is what I am thinking could happen. I cannot find a single bull around ( other then the few perennial ones like Embry and Sprott, on KWN ).

    2. Mike - Sorry to jump in...First, let's see what happens at the end of the day, both how equities react and if gold get clipped back at 1240 resistance yet again. But in a nutshell the ultrapoor job data seems to be an initial signal that QE is not working and the FED is not in control.

  12. A while back Dan wrote about start of year gold and silver futures buying or selling due to index fund rebalancing. In the comments section someone expressed interest in in seeing data regarding the scope of the rebalancing. Alisdair McLeod penned a piece on that very topic. I thought I'd share it here.
    Interesting to note that in his piece, McLeod states that the rebalancing purchases began on Wednesday the 9th, whereas Dan wrote that he felt the rebalancing would be completed by that time.


  13. its amazing to see the broad market going higher on this nfp numbers …. I wonder what they teach kids at business school these days

  14. "I always thought he was a goldbug at heart like the rest of us reading his columns."

    I sure hope he is NOT, when it's about trading, given the objectivity of the latter.
    Follow up of my trade : out 1/3 at 1238 and now still long with the rest of position, aiming at 1300+. Stop loss raised and locked at 1220 now, i.e my long entry level.
    Have a nice weekend,

  15. "Notice that once again volume is shrinking but that volume on the down bars continues to exceed that on the up bars. The bears are still in control for now."

    In the major US equities the reverse has been happening as the indexes rises. They rise on low volume and on the down days volume is massive.

    Goes against one of the main tenets of any bull market.


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